Trump’s tariffs pushed the U.S. uncomfortably close to a financial crisis before pause

President Donald Trump may have brought the world to the brink of a financial crisis before pausing his tariff war on Wednesday, as the $28 trillion market for Treasury bonds displayed unusual strains in the hours before his change of course.

Global investors sold large amounts of Treasury securities as the 12:01 a.m. deadline for imposing the highest U.S. tariffs in decades approached. The selling surge sent the yield on the 10-year Treasury bond, which was below 4% on Friday, to 4.5%, before it closed a tick lower. In the past three days, the rate on the 30-year Treasury jumped the most since 1982. Higher yields eventually mean higher borrowing costs, for both consumers and the federal government.

The speed of such moves in the normally placid Treasury market raised fears that some investors, perhaps including foreign central banks, were ditching U.S. government bonds amid a gathering panic over the unintended consequences of Trump’s 360-degree assault on global trade. That would mean the end of a century of U.S. financial supremacy and leave markets unsure of the values of stocks, bonds and other assets around the world.

Fears eased Wednesday afternoon after a routine Treasury auction of $39 billion in government debt proceeded without incident. But Trump acknowledged being aware of investor unease before deciding to reverse course and institute a 90-day tariff pause.

“The bond market is very tricky. I was watching it, but if you look at it now, it’s beautiful. The bond market right now is beautiful. But, yeah, I saw last night where people were getting a little queasy,” the president told reporters.

Indeed, one week after Trump shocked financial markets by announcing the largest import taxes in more than a century, investors were confronted by the prospect of a third financial crisis in less than two decades. This time, unlike in 2008 and 2020 when the U.S. led the rescue, the government was the cause.

“The market was feeling shaky. People have gotten nervous about the Treasury market in the last couple of days,” said Priya Misra, a portfolio manager at J.P. Morgan Asset Management in New York. “We’re still worried.”

One indication of that unfamiliar mood: Rather than rise as stocks declined following Trump’s April 2 tariff barrage, bond prices — which move opposite yields — fell.

As the market wobbled, several prominent figures sounded the alarm, warning that Trump’s trade war could morph into a capital war with implications for the government’s ability to finance its $1.8 trillion budget deficit by selling Treasurys at an affordable interest rate. Foreign investors, including central banks, hold almost one-third of the U.S. government securities that are traded publicly.

“Developments in the last 24 hours suggest we may be headed for [a] serious financial crisis wholly induced by U.S. government tariff policy,” Lawrence H. Summers, a former treasury secretary, posted on the social media site X.

Adam Tooze, a financial historian at Columbia University, wrote in his well-read daily newsletter that “we may be entering full-blown bond market meltdown.”

Treasury Secretary Scott Bessent, who canceled a scheduled meeting with House Republicans to speak with the president, said the 90-day tariff pause was unrelated to market concerns. Appearing outside the White House, Bessent, a former hedge fund manager, said Trump’s desire to be personally involved in negotiations with dozens of U.S. trading partners prompted the delay.

In an earlier television interview, Bessent sought to reassure investors, saying the price action was unexceptional. Fund managers who had invested borrowed money were forced to sell Treasurys to repay creditors who were demanding more collateral. That repayment, or deleveraging, was an expected part of any sharp market decline, he said.

“I believe that there is nothing systemic about this — I think that it is an uncomfortable but normal deleveraging that’s going on in the bond market,” Bessent said.

The fluctuations in government bond values, however, highlighted the financial implications of Trump’s determination to drive the $1.2 trillion trade deficit toward zero.

If that happens, foreigners would have fewer dollars — from selling goods to Americans — that they would need to invest in U.S. assets. As a matter of accounting, a trade deficit must be offset by a surplus in the capital account.

“Zero trade deficits would mean no demand, no overseas holdings of dollar assets. And Treasurys are the largest dollar asset that’s held by the rest of the world,” Misra said.

Eliminating foreign demand for U.S. government debt would probably mean Washington’s annual interest bill — already close to $900 billion — would swell.

The Treasury market was roiled by a number of developments in recent days, market participants said.

Normally, buying and selling Treasurys is quick and easy. But in the wake of the president’s April 2 tariff announcement, liquidity was thin, meaning a single large transaction could move prices more than usual, said Guy LeBas, chief fixed income strategist for Janney Capital Management.

Some investors who use borrowed money to buy stocks and bonds when the market is calm needed to sell bonds to repay their lenders when conditions became more volatile. Pension funds sold bonds to raise money to buy stocks, taking advantage of the nearly 20% decline in the S&P 500 index. Central banks and other foreign institutions drew back from their customary purchases of U.S. debt, spooked by the wild swings in U.S. policy.

China, which is both a strategic rival of the United States and a source of financing, has trimmed its holdings of U.S. debt to $761 billion, a 42% decline over the past 12 years. Some investors wondered whether Beijing may have chosen to accelerate its sales to strike back against Trump for imposing tariffs on Chinese goods of more than 100%.

But there is no public evidence of that, and specialists are skeptical. Dumping Treasurys quickly would drive down their selling price, meaning that Chinese institutions would be damaging their own financial assets.

“I’ve always thought that wasn’t that likely, because they’d just be hurting themselves,” said William English, a former economist with the Federal Reserve and now a professor of practice at Yale University’s School of Management.

Technical metrics tracked by bond fund managers showed unusual activity that suggested hedge funds were unwinding a popular bond market bet. A measure of the spread between Treasurys and an investment known as an interest-rate swap ballooned from about 77 basis points on the day Trump announced his tariffs to 97 basis points on Tuesday, an enormous move in such a short time, according to Bloomberg data.

“What is happening in the bond market is not normal,” LeBas said.

Higher tariffs also may have started rippling through the financial system. The cost of borrowing cash overnight, while using Treasurys as collateral, has risen in recent days. That suggests banks may be struggling to maintain adequate reserves to fund commercial loans, as companies faced with unexpected import taxes draw on their lines of credit, LeBas said.

With Trump hitting pause on his plan to tax goods from several dozen nations, investors now have time to rethink their strategies for riding out a protracted trade war or the longer-term reshaping of the global economy that the administration intends. Even with the additional time, that won’t be easy.

“We haven’t had this sort of a tariff shock in many, many decades. It’s hard to know what the tariffs’ effects will be in a modern globalized economy,” English said. “We don’t know what the effects will be, but probably not good.”